Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

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LOS ANGELES — An Obama administration challenge to recent changes to California's public employee pension laws may damage the credit of 15 California transit agencies, including the state's largest.

U.S. Department of Labor officials want California state to exempt transportation employees from the California Public Employees' Pension Reform Act of 2013, saying it violates a 1964 federal law that protects the collective bargaining rights of public transportation employees.

U.S. Labor Secretary Thomas E. Perez threatened the state's local transportation authorities with the loss of $1.6 billion of federal funds in 2013 alone if the state doesn't act.

As a result, Moody's Investors Service late Wednesday placed the credit ratings of 15 California transit agencies on review for downgrade, affecting $6.5 billion of rated debt.

"The rating action is prompted by the possibility that the agencies will lose federal grants that on average comprise about 13% of their operating revenue and 40% of their capital funding," according to the Moody's analysts.

A union representing transportation employees lodged a complaint with the U.S. Department of Labor on the grounds that the pension overhaul bill violates the 1964 federal law.

The Labor department certifies transit employee protections, including the right to collective bargaining, before the Federal Transit Administration can issue grants.

The state pension legislation's provisions, which apply only to people hired in 2013 and later, include a new maximum benefit, a lower-cost pension formula for safety and non-safety employees with requirements to work longer in order to reach full retirement age and a cap on the amount used to calculate a pension.

As a result of the dispute, Moody's analysts said the Department of Labor has not certified various grants to seven rated California transit agencies, threatening over $3 billion of federal aid and challenging their finances. The grants of the remaining California agencies are at risk of similar delay or decertification, according to the report.

The grant funding at risk includes $530 million in FTA grants awaiting certification as of the end of June, and an additional $1.1 billion for 99 grants still under development.

"There are significant negative consequences that a lack of resolution on this issue will have for service providers, employees, and transit users who depend on mass transit in California," Perez wrote in an Aug. 1 letter to California Gov. Jerry Brown. "Indeed, some grantees have informed the FTA that without federal funding they will face both service cuts and layoffs this year."

With that in mind, Perez gave the state until this Friday to act before making a determination on federal funds designated for the Los Angeles County Metropolitan Transportation Authority. Determinations impacting other agencies would follow.

Moody's analysts said in the report that the loss of federal operating grants could create significant financial strain for transit agencies and force them to cut service which would reduce fare revenues that in some cases are pledged to bondholders. The loss of federal funds could also result in the need for some transit agencies to issue additional debt, which would increase leverage ratios by reducing debt service coverage, said Emily Raimes, a Moody's analyst.

In the near term it doesn't look likely that the ratings on any of the debt would fall below investment grade, Raimes said.

"It depends on how long it takes for this situation to be resolved," said Julius Vitner, a Moody's analyst. "The longer it goes on and the longer the grants are withheld, the more liquidity stress the transportation agencies will operate under."

The agency with the most at stake is the Los Angeles County Metropolitan Transit Authority. Moody's placed $3.5 billion of Metro's debt on review.

L.A. Metro currently has $268 million earmarked for operating costs being held up by the dispute, but if the matter isn't resolved as much as $3.6 billion of federal funding could be at risk, said Marc Littman, a Metro spokesman.

So far, $1.6 billion of transit funding for transit authorities across the state has been held up, Littman said.

L.A. Metro officials said that both federal and state legislators are working to resolve the issue, but a spokesman for the governor's office did not sound conciliatory.

"The administration vigorously disagrees with the U.S. Department of Labor's legal opinion that California's landmark pension law impedes workers' collective bargaining rights," Brown spokesman Jim Evans said in an emailed response.

Thus far, California's efforts to resolve this issue with the federal government have proved fruitless, but "we are actively working on solutions to ensure the state's economy isn't damaged by this dispute," Evans said.

"On the positive side, while L.A. Metro has been caught in the middle along with its sister agencies - the state's elected officials understand the gravity of the problem," said L.A. Metro's chief financial officer Terry Matsumoto.

Assemblyman Luis Alejo introduced Assembly Bill 160 to exempt transit agencies targeted by the Department of Labor; the bill is currently in committee.

Matsumoto said that even if such legislation didn't pass, federal regulations supersede state law.

Littman said "no one wants to risk federal funding for L.A. Metro." He said the transit agency employees 43,000 people in Los Angeles County and billions of dollars in federal funding are at stake.

"They understand the gravity of this," he said.

During the review Moody's analysts plan to identify which transit agency credits are most at risk.